Chapter 11 bankruptcy is a form of corporate financial reorganization which typically allows companies to continue to function while they follow debt repayment plans. The theory here is that otherwise viable businesses that are allowed to continue to operate will generate revenue, protect jobs, and be able to pay off creditors over time. Selling off the assets of the company to pay debts is a possibility, but it may not satisfy all of the indebtedness, and could force a business to close its doors. In many cases, a reorganization which allows for a repayment plan that everyone agrees to makes more sense. Chapter 11 bankruptcy filings may also be “strategic”. In other words, management may wish to reorganize for political reasons, not simply for the sake of balancing books.

A business filing a Chapter 11 bankruptcy may be a corporation, sole proprietorship, or partnership. Even though the owners of a corporation are its stockholders, the corporation is a separate entity so when a corporation is the debtor in a Chapter 11 bankruptcy, the personal assets of the stockholders are not at risk. Of course if the value of their stock declines as a result of the bankruptcy, then the stockholders' investment is affected. A bankruptcy case involving a sole proprietorship, however, includes both the business and personal assets of the owners. And in a partnership bankruptcy case, the partners' personal assets may, in some cases, be used to pay creditors or the partners may be forced to file for personal bankruptcy protection. A very complete and detailed explanation of Chapter 11 can be found here.